As earnings season approaches, reports are emerging that suggest iPhone sales are slipping in China. The latest data point to support the idea that Apple's (AAPL 1.27%) top revenue generator is losing steam involves news of a "Lunar New Year sale" offer of 5% off some iPhone models. As sales are measures, it's not much of one, and it certainly is not one worth fretting over as some grand indicator of a downturn.
But it is a situation worth monitoring. Competing smartphone manufacturers in China are ramping up compelling alternatives, and some Chinese government agencies have barred their employees from using iPhones at work. It's a big deal for Apple, because "greater China" was the source of 19% of its total revenue in fiscal 2023 (which ended in September), and sales there actually fell 2.2% from fiscal 2022.
The iPhone is still Apple's breadwinner -- it hauled in more than half of the company's revenue last year (nearly $201 billion of the $383 billion total). Smartphones are a mature market these days, so it should come as no surprise that even the mighty iPhone is exhibiting some ups and downs.
But that's OK, as the Vision Pro is coming in early February 2024. Can the new device be the solution to Apple's slow-growth conundrum? And does it make Apple stock a buy even though it's already trading near an all-time high?
Does Apple really need a new blockbuster device?
With its hefty $3,499 price tag, Vision Pro could be an instant shot in the arm for Apple when it starts shipping to customers early this year. As I wrote last summer after CEO Tim Cook and company announced their "spatial computing" device (don't call Vision Pro a virtual or augmented reality device, or a "headset" like Meta Platforms' Quest), Vision Pro's premium price means Apple would only need to sell about 2 million each quarter to exceed its iPad revenue. (For reference, iPad sales added $6.44 billion to the company's top line fiscal 2023's fourth quarter -- 1.84 million Vision Pros at $3,499 a pop would generate that same amount.)
Apple's flagging device sales last year could certainly use the boost. Not even the company's lone source of growth -- its services unit -- was enough to offset a rough patch for the mobile computing giant.
Apple Product Segment |
Fiscal 2023 Revenue |
Change from 2022 |
---|---|---|
iPhone |
$200.6 billion |
(2.4%) |
Mac |
$29.4 billion |
(27%) |
iPad |
$28.3 billion |
(3.4%) |
Wearables, home, and accessories |
$39.8 billion |
(3.4%) |
Services |
$85.2 billion |
9.1% |
Total |
$383 billion |
(2.8%) |
Data source: Apple.
In short, if iPhone sales in China continue to decline in 2024, the debut of the Vision Pro could go some way toward offsetting that.
Keeping EPS steady despite slipping sales
Despite the pressure on Apple's device sales, the company still managed to keep earnings per share (EPS) flat in fiscal 2023 compared to the year prior -- and achieved a 13% year-over-year EPS increase in the September quarter. How?
Apple wields incredible control over its parts suppliers, and is able to squeeze them to keep its expenses in check (or reduce them). As a result, Apple reported an increase in gross profits (money left over after paying for the cost of making devices) even as its revenue declined a bit.
But in addition to that, Apple has goosed its EPS with a robust share repurchasing program. The company returned a whopping $167 billion to shareholders via stock buybacks in fiscal 2022 and fiscal 2023.
Even after that massive cash return, Apple still ended fiscal 2023 with nearly $62 billion in cash and short-term investments on the books, and another $101 billion in long-term investments, offset by debt of only $111 billion. Suffice it to say Apple still has incredible financial resources at its disposal, so more buybacks this year -- plus a boost from Vision Pro (and maybe a rebound in PC sales too) -- could have Apple in good shape in 2024.
Time to buy the stock?
No matter how you slice it, Apple is getting older. Its growth is far slower than it was in years past, and it has increasingly relied on stock buybacks and dividends to boost shareholder returns. And that's OK.
The big question investors need to grapple with is the company's valuation. Its shares trade for 30 times earnings as of this writing. But does an Apple with slower growth expectations warrant a premium that's on par with that given to younger, faster-growing businesses? I would argue no.
I recently explained why I sold much of my position in Apple stock -- due in part to its slow-growth expectations and a premium valuation. But I sold mostly because I was highly over-allocated to Apple after years of exceptional returns. Even after selling most of my shares in Apple, I still have a large position in it via other investments, but there are lots of long-term values out there right now.
I could be wrong about the Vision Pro. It could totally knock it out of the park and move the needle for the lumbering mobile device giant in grand fashion. But with the iPhone not exactly in growth mode anymore, there are too many headwinds buffeting Apple to allow me to feel comfortable buying its stock at its current rich valuation.